Category: Finance related

Continuing my attempts to bring Shakespeare into as many posts as I can….

Let specialties be therefore drawn between us,
That covenants may be kept on either hand.

(Taming of the Shrew II. i. 127-8)

A couple of weeks ago, I presented at the HR Technology Conference in Chicago, the topic being SaaS Contracts: how not to get ripped off. I made an animation to start the presentation, as talking about contracts can be a bit dry.

If the embedded version doesn’t behave, watch it here. My goal was to show the naivete of the typical buyer when dealing with a smooth salesperson. In the space of about 2 minutes, the buyer makes at least 9 major blunders. See if you can spot them. It is supposed to be funny, but I’ll let you be the judge of that.

A week or so after the event I did a podcast on the Bill Kutik Radio Show, where I go into a bit more detail. Have a listen here. I’m not a lawyer, so this doesn’t constitute legal advice, but I’m saddened by the ignorance on the side of the buyer, and the willingness of the seller to exploit that. That is business, I guess.

Or as Camillo said in The Winter’s tale:

You pay a great deal too dear for what’s given freely.

Also we have a lot of research on how to buy cloud/SaaS solutions. Gartner clients should definitely check out Alexa Bona’s research. Whether buying or selling, getting a fair contract is best in the long run.

(I’m very impressed with the Xtranormal tool for animation. I checked with their legal folks on usage, what a pleasure to deal with them).

Here are some quick thoughts on SAP’s Q3 performance. It was was okay. It wasn’t awesome, but it wasn’t grim either. Have a look here for what the FT says.

The headline number of 20% revenue growth seems impressive but strip out the Sybase numbers and it is very similar to Q2. You can read what John Rizzuto and I blogged about Q2 here.

As Per Q2, for the deeper financial analysis I’ll defer to John.

Core software product revenue again saw double digit increases, which signals that end-market demand remains relatively robust and SAP is benefiting from the increase in spending. With double digit growth year to date thus far, it is safe to say that SAP has gained market share or growing ahead of the market. However, was is troubling is SAP’s difficulties in expanding operating margin or meeting targets it has set. While not troubling, i.e., it is still very fiscally fit, it does speak to the challenges the company is having in managing its business to create incremental leverage – although it is self evident from Wall Street’s perspective why we want comparable margins, it also matter from a competitive standpoint as well. Specifically, it begs the question from any industry watcher, what is it that enables the other megavendors (i.e., MSFT, IBM, ORCL, even HP and Cisco) to run their business at operating margins, on average, 10%-15% higher?

Personally, I’m less concerned with the margin question, and more interested in the areas of customer satisfaction and new product innovation, as that is what I spend a good part of my day dealing with.

Snabe and McDermott both continue to paint a more positive and upbeat picture than their recent predecessors did. Both Sapphire and Teched were more energized than my in-memory can remember, as indeed are the last couple of earnings calls. The infectious exuberance in SAP-Land continues.

The anti-Oracle posturing has its place on earning calls, and trading taunts makes for good headlines. Nevertheless, it is not nearly as relevant for SAP customers as many observers think.

The challenge over the next 2 quarters is to show how the investment in newer technologies and applications is having a meaningful impact on the numbers. The market is the arbiter of innovation, not the vendor.

At the same time, the existing customer base needs to be brought along to the party. This means clear communication is at a premium. This is improving, but as the UK and German user groups note, there is still work to do.

If I was to live in America, I would become a baseball fan. I grew up with cricket, so despite my current German domicile, I’m a cricket fan. In many ways the games are different, but both games are bound by the common thread of bat and ball. Also, both games rely on extensive use of numbers and stats to provide both real time and historical data.

If one mentioned that England were 34/5 , it would enable me ( or any cricket fan) to make a precise judgement about the state of the game. Several hours of play summarised with 2 numbers. From this one can make some deductions about the wicket, the bowling and the brittle state of the English batting line up.

It is this clever use of numbers to create an immediate summary of the game that makes it easy to follow a cricket game while getting on with the rest of your day. 2 seconds on cricinfo brings me up to speed. A test match can last 5 days, but cricket, allows and encourages one to get on with other things while at the same time feeling part of the action. Cricket is the master of continuous partial attention, long before the phrase was invented.

As junior schoolboys someone would sneak a radio into class hide it in his desk, and then pass around a scrap of paper with the score on when anything happened. I think the teacher knew what was going on, but as long as play was relatively slow, he didn’t seem to mind.

I suppose the modern equivalent of that is the cricinfo applet running on my toolbar, and DRM permitting, the tones of Aggersm Boycott and Blofeld on TMS.

Full House is a true geek’s book. It combines paleontology, evolution, and baseball statistics to advance an elegant argument: that we humans have a counterproductive tendency to focus on averages and trends over time, rather than on variation around the average. For Gould, variation is where the action is.

Image a world where HR people were able to derive as much value and pleasure out of analytics as cricket and baseball fans do. At the moment most HR departments can’t even really keep score.

I had a great two weeks away from all things online, so I’m jumping into this debate rather late.

Part of my sporadic academic work of late has involved re-reading quite a lot of impenetrable stuff about the limits of empirical research in social sciences. Karl Popper etc. Do not fear, I will not attempt to force them on you here. In fact, I’m going to ask for the opposite here right now, I want a big solid pasta plate full of empirical research.

The blogosphere is full of folks dashing off opinions. Some are very erudite, others not. 99% of the blogs I read are opinions. That’s cool, there is nothing wrong with an opinion. I have a whole archive of them here on this very blog. It is just that an opinion, is well, just an opinion.

Cynthia Rettig recently published a short piece in the SMR called The Trouble with Enterprise Software Part of the piece is a rehash of ERP is complex, and therefore doomed argument. It is like the stuff Bobby Cameron did about SAP in the mid 1990s. The article also links to research about how CEO’s view CIOs. (similar results to how they view other C-level execs, I thought), and some commentary on large system complexity. It was strung together neatly enough, but it wasn’t based on any real research, at least in a recent enterprise software context.

The article’s core argument,

At present, however, corporations see in software’s seductive invisibility and seemingly open-ended flexibility a never-ending frontier of promise, where hope triumphs over reality and the search for the next new thing trumps addressing difficult existing problems.

Is tantamount to calling corporations stupid. Very few are, either that or us vendors have a conspiracy going that would defeat even Jason Bourne.

Some of my fellow enterprise software bloggers jumped to praise and expand on the article ERP is in a mess, and a donkey so they say.

The sober and understated language of this paper’s abstract contains a vital insight for people who question the overall value delivered to companies by their information technologies: if IT were not delivering value, rational decision makers would not keep investing in it. Rettig’s argument falls into a long line of pessimistic writing about the value of corporate IT. Much of this writing takes the implicit, and at times explicit, view that the executives who make technology decisions are dupes, perennially falling for a “triumphant vision” of software. These executives are presumably swayed by vendors’ sales pitches and the consistent message from IT’s ‘helper industries’—an ecosystem of analysts, journalists, consultants, and (yes) academics—that everything’s different now, so investments must be made.

I wonder why the much enterprise blogosphere has largely ignored one of the most significant empirical research projects on the link between IT and Productivity, yet hypes up a neat little polemic that offers nothing new? Perhaps because the empirical evidence jarrs with those dearly held opinions? After all, where is the techmeme spike for the post “SAP and Oracle worked fine in 10,000’s of business again today”?

This from Andrew McAfee: struck me as being incredibly simplistic and avoiding the reality that’s out there.

Odd that. I’m out ‘there’, and McAfee’s post describes exactly the ‘reality’ of much of my day job. The other week I was talking to a bank that is merging yet another take over and a huge utility dealing with deregulation. I spent most of a day recently with a very large chemical company that had gone from 47 core HR systems to one. The chap who normally sits opposite me is closely involved with a project at the largest food company in the world. Next week I’m at a leading high tech company helping work out what bits to run on the ERP, and what bits to run on niche applications, building a joint roadmap to reduce integration complexity. No, it is not all triumphant vision, but this stuff works. What all these companies have in common is that they are simplifying their businesses with an ERP system. The core ERP business is healthier than I’ve seen it since the late 1990’s.

“Staying the same will not work. The supply chain can hold your business model back, or propel you ahead,” says P&G CEO AG Lafley. “SAP allows us to get more in tune with the dynamics of the supply chain, with our consumers and with our customers.”

Or what the Nestle CEO says about the globe project, linking it to Nestle’s impressive business results.

…we’re fully benefiting from Globe, which now covers about 90 per cent of sales. That allows much better management of working capital and trade spend.

…”He puts Globe paramount among his enablers. “Globe allows us to have a much tighter management. A much greater level of transparency. Not only is the system now covering virtually all our businesses, we’re updating some of the earliest applications.”

by moving to a single ERP system for finance and at the same time implementing consistent data and technology standards, companies can cut the cost of finance operations by 23 percent, according to Hackett’s Book of Numbers™ Research. But companies that take either of these approaches independently may see little to no savings, or even a slight increase in finance operations costs, Hackett found.

World-class finance organizations rely on both of these approaches, which help them spend 31 percent less than their peers on finance, operate with nearly half the staff, and also complete their financial reporting cycle more quickly each month.

Hackett’s research found that world-class Fortune 500 companies run these functions at lower operational costs of $134 million/year ($7.1 million/billion of revenue) compared to typical companies, and process automation and IT enablement play a very significant role in realizing these lower non-IT back-office costs. In addition to this efficiency impact of IT, a direct correlation was found between performance of the IT function and effectiveness in finance, procurement, and HR

This stuff works.

Much of this blog is a rant against complexity, and if I look around here at SAP, I’d say fighting complexity is our biggest competitor. Sure we have much to learn about simplification, and we must get significantly better at reducing and managing complexity. But if there is one thing that I loathe more than unnecessary complexity it is the oversimplisitic. ERP is complex, so is the Belgian tax code. Many of those that damn SAP and Oracle for its complexity seem to suspend business reality when discussing the next great start up that will blow us away.

I’ll restate my rumplestilkin test.

Lock your new paradigm busting vendor in a room and only let them out when they have a compliant Polish payroll.

That sounds trite but most of what ERP applications do is complex ugly stuff. Companies do this stuff, not because they want to, but because a lawmaker, auditor, union or some regulatory authority demands it. I’ve argued before that putty and lego are not good metaphors for the software that helps run your business. If you can sprinkle some magic ceteris paribus dust on business, and create a neat guns or butter world, then enterprise software would be simple. Actually, you could do it on a napkin. But tell that to the folks who thought up the Norwegian (or was it Finnish) business travel per diem rules. (especially the ones about mileage rates for reindeer sled travel)

So keep the comments about ERP salespeople and Porsches rolling. But where is the big stonking empirically solid research that shows me that ERP is dying or that it doesn’t work?

I’ll finish this long opinion piece by quoting a bit more Andrew McAfee.

I agree that it’s important not to naively accept anyone’s triumphant vision of corporate IT. But it’s also important not to make claims in the other direction that are too sweeping. Perhaps most fundamentally, it’s critical at some point to stop floating hypotheses about IT’s impact (or lack thereof), and to start testing them. We have enough history and enough data to permit more excellent studies like the one conducted by Aral, Brynjolffson, and Wu. Designing and executing resarch that is both rigorous and relevant is difficult, at times dismayingly so, but as these three show it’s well worth the effort.

Today, I’m reliably informed, is the 5th birthday of the Sarbanes Oxley Act, so at the risk of scaring off yet more readers, some more SOX musings.

I stumbled across some interesting research (and several rantings) on SOX over the weekend. Sad, I know, that I spent Sunday night trawling through Academic Journals, but trust me, it beats German TV.

Have a look at this paper by Robert Prentice, “Sarbanes-Oxley: The Evidence Regarding the Impact of Section 404” . He is the Ed & Molly Smith Centennial Professor of Business Law, McCombs School of Business, University of Texas at Austin. I’m going to quote extensively from the paper here, so please excuse the rather long extracts. I tried to summarise it, but I found it pretty much without a wasted word. The paper links to many other research papers, and is an excellent launch pad to examine SOX via the facts, rather than soapbox rhetoric.

John knows his stuff on technology; I would not presume to challenge him on operating system innards, but frankly his piece on SOX, is not, how shall I put it politely, his best work.

After 5 years in operation, it is time that commentators, tech or otherwise looked at the emprical evidence, rather than relying on heresay.

I’m not saying SOX is perfect, and I have serious concerns about the continued high cost of audit fees. The law continues to require fine-tuning, and the recent changes to the PCAOB are timely, if not overdue.

Firstly, given the recent options backdating scandals in John’s “valley” I’d urge him to read section 409. The backdating scandals cost shareholders roughly 100 billion dollars at the low end of estimations see Gennaro Bernile et al. Section 409 makes this sort of large scale fraud much harder to commit, and makes it far less lucrative. This alone is enough to cover the cost of the SOX implementations for ages.

As we are reminising, please think back to 2002 and remember the state of the market.

As Prentice notes,

When SOX was passed, the stock markets were nearly in a free fall. From 2000 market peaks, the Dow Jones Industrial Average had dropped 25%, the S&P 500 had declined more than 40% and NASDAQ had plummeted more than 70%.52 Investor confidence in the capital markets was at record lows, causing average trading volume to drop 54%. The lack of confidence stemmed not from worries that Congress would legislate, as conservative pundits have asserted, but from that fact that 84% of the investing public believed that corporate wrongdoing was widespread rather than isolated. Professor Paredes noted at the time that “restoring [investor] confidence might be the most important thing that the SEC and Congress can do, just as it was the top priority during the crisis of confidence following the 1929 stock market crash.”

Also

Indeed, Lord and Benoit’s post-SOX study showed that over a two-year period, there was a 27.67% increase in the average share prices for companies that had effective internal controls in both years, a 25.74% increase in average stock price for companies that had ineffective SOX 404 controls in year one but effective controls in year two, but a 5.75% decrease in average stock prices of companies that reported ineffective Sox 404 controls in both years.

and further

..consider that in October 2002, “the dark days when the market was most nervous about the quality of financial reporting,”65 credit spreads for investment grade companies were 2.5 percentage points over Treasury rate whereas by 2006 that spread had shrunk to .85%. The managing director of Moody’s Investors Services has stated that not all of that shrinkage can be “attribute[d] to 404, but if only 10 percent of that reduction is due to 404, put those numbers in your calculator and you get a benefit that is absolutely enormous.

Prentice then goes on to look at Improving Corporate Governance,Liquidity (see also this paper), financial reporting, fraud detection and deterrence, the impact on the competitiveness of US security markets. It is a through paper, and if you are even vaguely interested in compliance it is a must read.

He concludes by noting

Faith in U.S. capital markets has been substantially restored following the bursting of the dot-com bubble and the exposure of a scandalous corporate culture at many major corporations. Sarbanes-Oxley and its Section 404 helped enable that resurrection.

The commonly perceived burdens of SOX 404, including implementation costs and impact on U.S. capital markets, are real but have been overstated while its real benefits are often overlooked. Considerable empirical academic evidence indicates that SOX 404 has improved the accuracy of financial reporting, improved liquidity and corporate governance, and helped disclose some frauds and discourage others.That said, it is impossible at this point in time to accurately weigh SOX’s total benefits against its total costs. None of the scores of academic studies cited in this article purports to settle definitively the question of whether SOX in general or Section 404 in particular have been, on balance, beneficial. Therefore, what must continue to occur is a careful, reasoned study of SOX’s provisions and their impact.

While there is substantial reason to believe that SOX has improved the economy and brought various concrete benefits to the capital markets, if its detractors succeed commercial actors in the U.S. will ultimately view SOX, and especially Section 404, as illegitimate. This eventuality would blunt SOX’s positive impact upon beliefs, norms, and practices in the U.S. capital markets and its potential to create and sustain a culture of compliance and integrity will be seriously damaged. If that happens, it becomes much more likely that SOX’s costs will ultimately exceed its benefits than if SOX 404 is viewed as a legitimate, though somewhat flawed, attempt to restore integrity to the U.S. capital markets. And the current evidence indicates that is much closer to the truth.

John Dvorak also goes about the supposed capital flight:

Thus they jump onto the London stock exchange or become Canadian corporations, maybe even Swiss corporations. They’ll do anything to pick up the extra 4% profit not to mention the advantage of avoiding the SOX paperwork and the worries about missteps.

This defies both logic and the facts. Firstly it assumes there is no cost of compliance or regulation elsewhere. Secondly, there is little evidence for significant “jumping” due to SOX costs. See this post here. and this paper here.

And to show that this blog isnt just a SAP GRC flag waving exercise, I’ll quote again from an SAP GRC competitor, Approva, whose recent survey of CEO’s points to an entirely different reality from Dvorak’s vague “…blame Sarbanes-Oxley and so does everyone else in the valley” point.

Despite widespread media coverage that public companies are begging for a reprieve from SOX, Approva’s survey found that 83 percent believe the Sarbanes-Oxley Act ha had an overall positive impact on their companies. And 63 percent believe SOX has been successful in preventing corporate fraud. Seventy percent of respondents believe that investments in SOX compliance will provide benefits beyond compliance alone.

The time for vague blah blah on SOX is so over. To repeat Prentice’s words… what must continue to occur is a careful, reasoned study of SOX’s provisions and their impact.

Last week James Governor kindly bought me lunch and gave me a book. The curry was very good, but the book has had a profound impact on me. It is not often that I finish a book, and then immediately read it again. Nassim Nicholas Taleb’s book, Fooled by Randomness is such a book.

Throughout my business studies at university, I heard a lot about the rational man. Rationality became something assumed. At the centre of most economic, efficient market and business theory is the rational, self interested behaviour. This book knocks that on the head.

Nassim has performed format c: on a goodly portion of my naive assumptions about financial markets and life in general. He has validated lots of what Francis Antonie and Douglas Irvine taught me as a political philosophy student years ago and I’d forgotten. It is time to dust off Karl Popper, and start thinking again.

Photo from Flickr by launceston_lad

Black swans are symbolically important, because until Australia was discovered, it was believed that all swans are white. This is a good example of a logical fallacy. There is a difference between there is no evidence of black swans, and there is evidence of no black swans.

We humans tend to fall into the induction trap. I do it a lot.

In the airport on the way home I spotted his new book. It has the title, you guessed it, Black Swan. I was glad my flight was delayed. I could read more of it. He Americanises Betrand Russell’s chicken, turning it into a turkey.

“My major hobby is teasing people who take themselves & the quality of their knowledge too seriously & those who don’thave the guts to sometimes say:I don’t know.…” (You may not be able to change the world but can at least get some entertainment & make a living out of the epistemic arrogance of the human race).

Nassim writes very well, the prose is tight and buzzword free. He doesn’t dumb things down and he explains without being condescending. He merges a fantastic knowledge of the classics with a profound grasp of probability. He is witty but serious.

So many new things to learn, and so much that I learned decades ago but need to rediscover: Hindsight bias, Platonic folds, logical fallacy, epiphenomena, exquisite cadavers, induction, Mandelbrot, Hume, Wittgenstein’s ruler, negative skewness, Extremestan and Mediocristan.The list goes on.

My readers will have noticed I’ve been working on trying to understand risk recently, and Nassim’s work has made me realise that risk isn’t as simple as I thought it was. After spending most of my adult life avoiding statistics, I’m realising the folly of my ways.